Financial, swing-trading and Elliott Wave stock analysis for short-term traders.
Disclaimer: These articles are neither buy nor sell recommendations. You must do your own analysis and consider your own risk, money management, and trading strategy before placing any trades.

Monday, July 11, 2016

ALK Signaling Short Near Resistance and 30-day EMA

When a stock is clearly trending, I am primarily a pull-back trader. There are several pull-backs for which I set my scans:

Pull-back to a 10-day Simple Moving Average. This type allows you to capture a brief pause in stocks that are quite often in an extended Wave 3. While slightly higher in risk, they also let you catch some excellent moves that other pull-back strategies miss.

Pull-back to a 20-day Exponential Moving Average. The 20-day EMA is an extremely popular line watched by enough technical traders to make this a very consistent entry point.

Pull-back to a 30-day Exponential Moving Average. This is quite often a decision point for a stock. If it bounces off the 30-day EMA, you often have a nice move back in the original direction. If it breaks through and holds, you often have either a consolidation develop or a trend reversal.

Pull-back to a resistance line. While I'm not a fan of breakout strategies (the percentage that form either a bull trap or a bear trap are too high for my taste,) I do like playing bounces off support and resistance. That's especially true if it's the first touch of that line after the completion of a different pattern or trend.

While running some intra-day scans today, several airline stocks popped up as potential shorts with pull-backs nearing the 30-day EMA and also nearing a major line of resistance. Alaska Airlines (NYSE: ALK) is one such airline stock giving a "short" signal as it nears both the 30-day EMA and a very strong line of resistance.

ALK signaling short near EMA(30) and strong resistance

There are a number of confirming signals appearing on this chart:

There is a double top (not labeled) that formed between December and May. The neckline was finally broken in June, and we've had a pullback to that neckline. The price target for that pattern is around $48.

Since late April, the stock has been in a downtrend, and has completed 3 of the 5 impulse waves.

Wave 2 was a flat correction, and Wave 4 is a zig-zag with a steep retrace of the prior wave. In fact, it's at about the 50% retrace level as of today.

Waves 2 and 4 show alternation as required by Elliott Wave Theory.

The candles over the last two days show a failure to drive the stock higher. On both days, the stock finished flat with a very long wick above the candle body. That's a very bearish indicator.

There is overhead resistance right above the current level that was a very strong support level for well over a year. (Remember, support becomes resistance, and vice versa.)

The price has stalled between the 20-day EMA and the 30-day EMA.

Wave 4 has traced a well-defined A-B-C correction.

Price has stalled just after penetrating a bearish trend-line connecting the start of the move with the top of Wave 2. (Remember, I'm not a breakout trader.)

Because the market has been strong recently, we'll want to see confirmation of the down move before going short. What I'll be looking for at this point is a clear bearish candle with a close below the open in the bottom 25% of the daily range, coupled with a close back below that bearish trend-line referenced earlier.

There are some cautionary notes to factor into the trade:

Wave 3 is shorter than Wave 1. This forces Wave 5 to be the shortest of the three waves.

ALK releases earnings before the open on Thursday, 7/21. We'll want to be out of any trades no later than the close on 7/20.

While not yet announced, we expect ALK to go ex-dividend around 8/13, paying $0.275 per share.

Since we need confirmation, we don't yet know our entry price. We do, however, know the target range. Because of the Wave 3 constraint, we can only target a range of $50.38 (76.4% of Wave 3) to $47.21 (100% of wave 3.) The greater challenge with this trade, however, will be time. The rate of movement for this stock at the moment puts us around $54 when we need to exit before earnings. That will need to be factored into our risk vs reward calculation, and it's why I prefer not to enter a trade within ten days of earnings. Still, if ALK provides a strong signal tomorrow, I may well take the trade for some very short term action. It will all depend on tomorrow's candle.